Employee incentive plans: so many options
Growth shares: a long-standing client is expanding its workforce at pace as it opens more outlets. As the face of its business, a loyal workforce is a key to its long term success. Growth shares were introduced as a new share class in the company’s Articles of Association. The shares have been issued at a specified hurdle rate meaning that the holders benefit from a share in the future capital growth of the company with no income tax liabilities since schemes of this nature are structured so that the benefit is a capital gain. The scheme on which we recently advised will be managed through the Vestd platform and the company expects tens or maybe over a hundred employees to benefit.
Enterprise Management Incentive (“EMI”) schemes: most growth companies are eligible for EMI and there is lots of scope for structuring around the conditions against which rights vest and options become exercisable. The detail usually comes in the share valuation that needs to be agreed with HMRC and the slight complexity in terms of tax efficiency both for the grantee (the employee) and the company. EMI schemes should also be registered with HMRC. Our client has used this mechanism for certain director-level appointees whose retention is central to the long term resource plan of the business.
Phantom shares: we see these used by companies which, for whatever reason, are not able or not inclined to issue options over shares; but wish to secure for their employees a form of bonus payment linked to the value of the equity in their company. Our client in this example was a recent joiner into a company whose foreign shareholders would not consent to new share issues and where there were other restrictions making a “share” based scheme difficult.
Other schemes are also worth considering including company share option plans that sit outside the regulated EMI rules.
The issues that invariably come up in the negotiation of these schemes include pricing and discretion. In layman’s terms: is the exercise price fair in light of all of the conditions around an option scheme? And can a company really have the level of discretion that may shareholders and boards seek around when and how options are exercised?
Our comment on the issue of “price” is that this cannot be considered without careful thought as to the position of HMRC. In our experience, HMRC are very responsive and understanding on these issues and often see the employee perspective. There is no wish to penalise employees or employers and HMRC acknowledges the risks that parties are taking.
On “discretion”, the employer is often on difficult ground. Courts are very reluctant to allow employers absolute discretion and at the minimum it is expected that such decisions will be made appropriately, rationally and without leading to any perverse consequences. There is a lot of legal case law on this issue and on which we have advised in recent months.